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From the November 8th Presidential election to year end, the S&P500 was up 4.6% and the DJIA was up 7.8%. Though there were initial expectations that a Trump win would cause some immediate weakness in the market, instead, the market focused on policy changes that could have a positive impact on economic activity. For example, the long term lagging financial sector led the rally on expectations of a significantly reduced regulatory environment and the fact that higher interest rates will improve profit margins. It is interesting to note that the DJIA far outpaced the S&P500 primarily due to the performance of one stock. Since the DJIA is price weighted and Goldman Sachs is the highest priced stock in the index, the move in Goldman Sachs actually represented over 20% of the rally on its own.
Since 1980, from the Presidential Inauguration to the end of the year, the S&P500 has averaged an 11% return. The only time it was down for the year was after the Reagan Inauguration in 1981 when the market ended the year down about 8% as we were in an economic recession. However, 1982 was the beginning of one of the best bull markets in history. The DJIA went up nearly 150% from 1982 to 1988 and still much higher for years after the Reagan Administration.
This month the market went mostly sideways until the break to new highs today. As this Quarterly Overview is being written, the DJIA opened the day above 20,000 for the first time. The market has been driven by many factors but, primarily seems fixated on the policies of the Trump administration which are deemed pro-growth. The reduction of costly and burdensome regulation is expected to spur economic growth. One of the more important policy shifts will be a reduction in taxes at both the personal and business level. Consumer spending represents about 70% of economic output and with more spendable income, confidence and a more business friendly regulatory atmosphere, it is anticipated that economic growth as measured by the GDP will exceed 3% quickly.
The market itself is a leading indicator. The simple fact that it is doing well now may foreshadow better times ahead. However, since the market is trading based on expectations of things yet to come and a timeframe for policy changes that is uncertain, it may be a little ahead of itself in the short term. Also, sometimes a major milestone like the DJIA hitting 20,000 can create a level of resistance that sets a short term top. Obviously the market does not go straight up. That said, we would not advise trying to trade an expected correction. We believe strongly that a market correction anytime soon will be met with pent up demand for equities and the downside will be relatively shallow and short lived. We judge that staying invested through any near term weakness will be rewarded intermediate and longer term.
We have confidence that the bull market is intact and will continue to be driven by policies that stimulate the economy and a consumer whose confidence continues to grow. Though interest rates are expected to rise, higher interest rates and even inflation do not derail a bull market until they rise to the point where they start to restrict economic activity. We remain bullish intermediate to longer term. Stay long the market.
Stay warm this winter, spring will soon be upon us!
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